QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-27828

TN-K ENERGY GROUP INC.

(Name of registrant as specified in its charter)

Delaware

13-3779546

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

649 Sparta Highway, Suite 102, Crossville, TN

38571

(Address of principal executive offices)

(Zip Code)

(931) 707-9599

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 38,176,085 shares of common stock are issued and outstanding as of May 10, 2013.

TABLE OF CONTENTS

Page No.

PART I. - FINANCIAL INFORMATION

Item 1.

Financial Statements.

4

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

18

Item 3.

Quantative and Qualitative Disclosures About Market Risk.

21

Item 4.

Controls and Procedures.

21

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

21

Item 1A.

Risk Factors.

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

21

Item 3.

Defaults Upon Senior Securities.

21

Item 4.

Mine Safety Disclosures.

22

Item 5.

Other Information.

22

Item 6.

Exhibits.

22

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, among others, the following:

•

our ability to continue as a going concern,

•

our business and growth strategies,

•

risks associated with the external factors that impact our operations,

the impact of government regulation and the impact of possible changes in tax laws.

Forward-looking statements are typically identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently. The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to a number of factors, including:

•

significant unforeseen events that have global or national impact such as major political disruptions, extended economic depression, and technological breakthroughs in producing oil and natural gas or in producing alternative forms of energy,

•

unanticipated future changes in oil or natural gas prices, and

•

other uncertainties inherent in the production of oil and natural gas.

You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. You should also consider carefully the statements under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2012 and other sections of this report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

2

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms “TN-K", "we"", "our", the "Company" and similar terms refer to TN-K Energy Group Inc., a Delaware corporation formerly known as Digital Lifestyles Group, Inc.. In addition, when used herein and unless specifically set forth to the contrary, “First Quarter 2013” refers to the three months ended March 31, 2013, “First Quarter 2012” refers to the three months ended March 31, 2012, “2013” refers to the year ended December 31, 2013, and “2012” refers to the year ending December 31, 2012.

Change in fair value of derivative and liquidating damages liabilities

-

(1,907,583

)

Gain on writeoff of notes payable and accrued interest

-

(1,342,684

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Changes in operating assets and liabilities:

Accounts receivable

-

13,334

Accounts receivable - related party

2,382

-

Accounts payable and accrued expenses

(16,790

)

(10,415

)

Net Cash (Used by) Provided by Operating Activities

(37,726

)

57,068

Cash Flow From Investing Activities:

Purchase and development of oil and gas rights

(4,825

)

(25,087

)

Refund of asset retirement deposits

-

22,000

Net Cash Used by Investing Activities

(4,825

)

(3,087

)

Cash Flow From Financing Activities:

-

-

Net increase (decrease) in cash

(42,551

)

53,981

Cash and cash equivalents at beginning of period

486,464

140,658

Cash and cash equivalents at end of period

$

443,912

$

194,639

Supplemental cash flow information:

Cash paid for interest

$

-

$

-

Cash paid for taxes

$

-

$

-

Non-cash financing activities:

Equity issued for debt and interest

$

-

$

71,988

See accompanying notes to condensed financial statements.

6

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION.

Organization

TN-K Energy Group Inc. is an independent energy company engaged in the acquisition and development of crude oil reserves and production in the Appalachian Basin and to conduct directly and indirectly through third parties, operations on the properties. In these Notes, the terms “Company”, “TN-K”, “we”, “us”, “our” and terms of similar import refer to TN-K Energy Group Inc.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. The accompanying consolidated financial statements should be read in conjunction with the Company’s form 10-K for the fiscal year ended December 31, 2012 which was filed on April 19, 2013.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company has incurred losses since inception and has negative cash flows from operations and a substantial portion of the debt is in default and has a stockholders’ deficit of $(1,457,234) as of March 31, 2013. The future of the Company is dependent upon its ability to obtain additional equity and/or debt financing and upon the continued development of commercially viable producing wells at levels which significantly increase the Company’s revenues and net income. Management cannot assure that the Company will be able to secure such financing or obtain financing on terms beneficial to the Company or that the Company will be able to significantly increase its revenues and net income. Failure to achieve these goals may result in the Company’s inability to continue as a going concern and the impairment of the recorded long-lived assets.

These financial statements do not include any adjustments relating to the recoverability and classifications of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Cash and Cash Equivalents — For purposes of reporting cash flows, we consider cash equivalents to be all highly liquid investments with a maturity of three months or less at the time of purchase. The Company typically has cash in banks in excess of federally insured amounts.

Use of Estimates - Our financial statements are prepared in accordance with GAAP. Preparation in accordance with GAAP requires us to (1) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and by the United States Securities and Exchange Commission (“SEC”) and (2) make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and other disclosed amounts. This Note describes our significant accounting policies. Our management believes the major estimates and assumptions impacting our financial statements are the following:

•

estimates of proven (i.e., reasonably certain) oil and gas reserve quantities, which affect the calculations of amortization and impairment of capitalized costs of oil and gas properties;

•

estimates of the fair value of oil and gas properties we own, particularly properties that we have not yet explored, or fully explored, by drilling and completing wells;

•

estimates of the fair value of stock options at date of grant;

•

estimates of the fair value of the derivative liabilities;

•

estimates as to the future realization of deferred income tax assets; and

•

the assumption required by GAAP that proved reserves and generally proved reserve value for measuring capitalized cost impairment be based on the prices of oil and gas at the end of the reporting period.

7

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).

The estimated fair values of our unevaluated oil and gas properties affect the calculation of gain on the sale of material properties and affect our assessment as to whether portions of unevaluated capitalized costs are impaired, which also affects the calculation of recorded amortization and impairment expense with regards to our capitalized costs of oil and gas properties.

The fair value of stock options at the date of grant to employees and members of our Board of Directors is based on judgment as to expected future volatility of our common stock and expected future choices by option holders as to when options are exercised.

Actual results may differ from estimates and assumptions of future events. Future production may vary materially from estimated oil and gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.

Fair Value — The carrying amounts reported in the balance sheets for cash, and accounts receivable approximate fair value because of the immediate or short-term maturity of these financial instruments. Predominately most of the payables are the results of operations and financings of our prior business which ceased operations in 2005, as a result of the undercapitalized nature of our Company and the age of these delinquent payables, we are unable to determine the fair value of these payables.

Accounts Receivable and Credit Policies — We have certain trade receivables consisting of oil and gas sales obligations due under normal trade terms. Our management regularly reviews trade receivables and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. At December 31, 2012 and 2011, management had determined no allowance for uncollectible receivables was necessary. At March 31, 2013 and December 31, 2012, we had accounts receivable and receivables from the production of oil sale of $22,513, of which $0 was accounts receivable-related party, and $24,895, of which $0 was accounts receivable-related party, respectively.

Asset Retirement Obligations — When we incur an obligation for future asset retirement costs, we record as a liability and as a cost of the acquired asset the present value of the estimated future asset retirement obligation. For example, when we drill a well, we record a liability and an asset cost for the present value of estimated costs we will incur at the end of the well’s life to plug the well, remove surface equipment and provide restoration of the well site’s surface. Over time, accretion of the liability is recognized as an operating expense, and the capitalized cost is amortized over the expected useful life of the related asset. Our asset retirement obligations (“ARO”) relate primarily to the plugging, dismantlement, removal, site reclamation and similar activities of our oil and gas properties. Due to the small amount of such monies related to the asset retirement obligations as of March 31, 2013 and December 31, 2012, this amount is included in accrued expenses on the balance sheet.

The following table reflects the change in ARO at:

March 31, 2013

December 31, 2012

Asset retirement obligation beginning of period

$

30,040

$

48,860

Liabilities incurred

-

-

Liabilities settled

-

(23,180)

Accretion

400

4,360

Revisions in estimated liabilities

-

-

Asset retirement obligation end of period

$

30,440

$

30,040

Current portion of obligation end of period

$

-

$

-

Oil and Gas Properties — We use the successful efforts method of accounting for oil and gas activities. Under this method, subject to a limitation based on estimated value, all costs are capitalized directly associated with property acquisition, exploration and development. Internal costs that are capitalized at March 31, 2013 and December 31, 2012, were nil as such costs have been limited to costs directly identifiable with acquisition, exploration and development activities for the Company’s account and exclude indirect costs and costs related to production or general corporate overhead.

The Company follows the successful efforts method of accounting for its oil and gas activities. Accordingly, costs associated with the acquisition, drilling and equipping of successful exploratory wells are capitalized. Geological and geophysical costs, delay and surface rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. Costs of drilling development wells are capitalized. Upon the sale or retirement of oil and gas properties, the cost and accumulated depreciation or depletion are removed from the accounts and any gain or loss is credited or charged to operations.

8

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).

Capitalized costs of oil and gas properties evaluated as having, or not having, proved reserves are amortized in the aggregate by country using the unit-of-production method based upon estimated proved oil and gas reserves. The Company currently does not have any gas production, which is sold, but we have developed policies to be inclusive of such production, if and when the Company becomes capable of selling such gas. For amortization purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. Amortizable costs include estimates of future development costs of proved undeveloped reserves. The costs of properties not yet evaluated are not amortized until evaluation of the property. We make such evaluations for a well and associated lease rights when it is determined whether or not the well has proved oil and gas reserves. Other unevaluated properties are evaluated for impairment as of the end of each calendar quarter based upon various factors at the time, including drilling plans, drilling activity, management’s estimated fair values of lease rights by project, and remaining lives of leases.

Capitalized costs of oil properties (net of related deferred income taxes) may not exceed a ‘ceiling’ amount equal to the present value, discounted at 10% per annum, of the estimated future net cash flows from proved oil reserves plus the cost of unevaluated properties (adjusted for related income tax effects). Should capitalized costs exceed this ceiling, the excess is charged to earnings as an impairment expense, net of its related reduction of the deferred income tax provision. The present value of estimated future net cash flows is computed by applying period-end oil prices of oil to estimated future production of proved oil gas reserves as of period-end, less estimated future expenditures (at period-end rates) to be incurred in developing and producing the proved reserves and assuming continuation of economic conditions existing at period-end. SEC guidance allows the ceiling to be increased for subsequent events occurring reasonably before the filing date of the affected financial statements and indicative that capitalized costs were not impaired at period-end. Such subsequent events are increased oil prices and the proving up of additional reserves on properties owned at period-end. The present value of proved reserves’ future net cash flows excludes future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet.

Equipment — We record at cost any long-lived tangible assets that are not oil properties. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets of three to seven years. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Long-lived assets, other than oil and properties, are evaluated for impairment to determine if current circumstances and market conditions indicate the carrying amount may not be recoverable. We have not recognized any impairment losses on non oil and gas long-lived assets.

Impairment — The accounting guidance, Accounting for the Impairment and Disposal of Long-Lived Assets, requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil properties accounted for using the successful efforts method of accounting (which we use) are excluded from this requirement but continue to be subject to the successful efforts method’s impairment rules.

Revenue Recognition— We recognize oil revenues from our interests in producing wells when production is delivered to, and title has transferred to, the purchaser and to the extent the selling price is reasonably determinable. We recognize the sale of the partial interests in our oil wells once the terms of such contract have been fulfilled.

Major Customers— During the three months ended March 31, 2013 and 2012, we had two customers, respectively accounting for 100% of oil sales. Because there are other purchasers that are capable of and willing to purchase our oil and because we have the option to change purchasers on our properties if conditions so warrant, we believe that our oil production can be sold in the market in the event that it is not sold to our existing customers, but in some circumstances a change in customers may entail significant transition costs and/or shutting in or curtailing production for weeks or even months during the transition to a new customer.

Net Income (Loss) Per Share— Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted number of common shares outstanding during the period. Diluted net income (loss) per share reflects per share amounts that would have resulted if dilutive potential common stock had been converted to common stock.

Concentration of Credit Risk — Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash. We maintain substantially all cash assets at one financial institution. We periodically evaluate the credit worthiness of financial institutions, and maintain cash accounts only in large high quality financial institutions. We believe that credit risk associated with cash is remote. The Company is exposed to credit risk in the event of nonpayment by counter parties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counter parties is subject to continuing review.

9

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).

Share-Based Compensation — We adopted the accounting guidance for, Share-Based Payments, on a modified prospective basis. The accounting guidance requires publicly-held companies to recognize in their statements of operations the grant-date fair value of stock options and other equity-based compensation to employees, consistent with the rules for options to non-employees.

Reclassification — Certain amounts in the 2013 and 2012 consolidated financial statements have been reclassified to conform to the March 31, 2013 financial statement presentation. Such reclassifications have had no effect on net income (loss).

Recent Accounting Pronouncements

All newly issued but not yet effective accounting pronouncements have been deemed to either not be relevant or immaterial to the operations and reporting disclosures of the Company.

NOTE 3 — OIL AND GAS PROPERTIES AND EQUIPMENT.

Oil and Gas Properties and equipment consisted of the following:

March 31, 2013

December 31, 2012

Oil and gas properties, successful efforts method

Unevaluated costs, not yet subject to amortization

$

1,392,679

$

1,392,679

Evaluated costs

1,250,827

1,246,077

Asset retirement costs

39,600

39,600

2,683,106

2,678,356

Well equipment, furniture and software

157,309

157,309

2,840,415

2,835,665

Less accumulated depreciation, depletion and amortization

(854,183

)

(794,041

)

Oil and gas property and equipment

$

1,986,232

$

2,041,624

Unevaluated Oil Properties

Costs directly associated with the acquisition and evaluation of unproved properties are excluded from the amortization computation. The following table shows, by year incurred, the unevaluated oil and gas property costs (net of transfers to evaluated costs and net of sales proceeds) excluded from the amortization computation:

Year Incurred

Net Costs

Incurred

Three months ended March 31, 2013

$

0

Year ended December 31, 2012

842,811

Year ended December 31, 2011

(592,569)

Year ended December 31, 2010

916,532

Year ended December 31, 2009

225,905

Prior to 2009

-

$

1,392,679

Costs associated with unevaluated properties are primarily lease acquisition costs. At December 31, 2012, we drilled 12 dry holes and recorded an impairment expense of $21,739, associated with dry holes. Pending costs of $100,715 for wells-in-progress existed at December 31, 2012. During the three months ended March 31, 2013 and March 31, 2012, we recorded an impairment expense of $75 and $120,192; respectively, as a result of well rework efforts and further evaluation of some wells plugged due to insufficient production. There are no unevaluated costs relating to significant development activities. Reclassification of other unproved property costs to evaluated costs is largely dependent on (i) how quickly we drill on the unevaluated property, (ii) the results of such drilling, (iii) if third-parties pay drilling costs to earn a portion of our interest, and (iv) quarterly assessments of such costs for impairments.

10

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 3 — OIL AND GAS PROPERTIES AND EQUIPMENT (continued).

Prospect leasing and acquisition normally require one to three years, and the subsequent evaluation normally requires an additional one to three years.

Acquisitions of oil properties

On January 31, 2012, per a Memorandum of Understanding the Company negotiated the sales of third party oil and gas leases, known as the Bayer, Smith, Endicott and Warren leases, located in Overton County, Tennessee and totals approximately 500 acres oil leases for a finder's fee of $75,000 and a 9.5% overriding royalty interest in the existing production of 1 well and 10% overriding royalty interest in the balance of these leases and at no upfront cost to the Company and no additional future completion and operating costs. The Company also received a drilling participation right of up to 30% net working interest in up to 10 additional new wells per lease.

On March 2, 2012, per a Memorandum of Understanding the Company participated and permitted 27.5% working interests as the operator in the Willard Delk Well #1 at the cost of $18,500 and is responsible for 32% of the all costs associated with the well.

On March 7, 2012 per a Memorandum of Understanding the Company permitted 25% working interests in the Billy Duvall Well #1 at the cost of $16,500 and is responsible for 30% of the all costs associated with the well.

On April 11, 2012 per Memorandum of Understanding on the Roquel Chambers lease, dated December 16, 2011, the Company opted into the participation right to drill Chambers Well #001 for 30% working interest at the cost of approximately $11,000 and is responsible for approximately 35% of the costs associated with the well.

On April 12, 2012, the Company entered into a 25% interest in a 100% working interest lease named the Teddy Hicks Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 70 acres, located in Clinton County, Kentucky. The Company is responsible for 32% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 68% of such costs.

On April 17, 2012, the Company completed the sale to Texas Mineral Properties, LLC, d/b/a BSAG Properties, LTD of its 27.5% working and operating interests in 738 acres in Green County, Kentucky known as the J.R. and Pansy Clark lease, which also included 42 oil wells and a checkerboard lease. We acquired these various interests in 2009 and 2010. The Company retained a 2.5% working and operating interests in all of the wells whereby the 27.5% working and operating interests were sold. As consideration for our working and operating interests, under the terms of the Contract For Sale of Oil & Gas Leasehold Estate we received:

• a cash payment of $716,666.68 (including commissions of $316,667),

• a 5% overriding royalty interest (ORI) of 100% interest for the entire JR and Pansy Clark checkerboard lease which is also referred to as the Clark Brothers lease,

• a 5% ORI of 100% interest in the Simmons lease in Green County, Kentucky which presently has 14 operating oil wells,

• a 5% ORI of 100% interest in the Blaydes lease in Green County, Kentucky which presently has seven operating oil wells,

• a 5% ORI of 100% interest in the Ervin lease in Green County, Kentucky which presently has five operating oil wells, and

• a 5% ORI of 100% interest in the Hickerson lease in Green County, Kentucky which presently has three operating oil wells.

Under the terms of the Agreement, we were responsible for a pro-rata share of the closing costs, estimated to be $12,000, and the payment of all personal property taxes related to oil produced by us for the current tax year up to the date of closing.

As a result of the aforementioned transaction of acquiring these new interests in operating wells, the Company obtained an appraisal of such additional oil well interests acquired. The fair value of the additional oil well interests acquired were $862,370 plus the cash consideration received of $400,000 aggregated to a sale of oil and gas lease revenue of $1,262,370, which has been recorded as revenues. The costs attributed to this transaction amounted to $415,538 of book value relinquished of oil and gas property value and $49,478 of recorded value of related equipment, which has been presented as a cost of oil and gas leases sold in the amount of $465,016.

On April 24, 2012, per Memorandum of Understanding on the Roquel Chambers lease, dated December 16, 2011, the Company opted into the participation right to drill Chambers Well #002 for 30% working interest at the cost of approximately $11,000 and is responsible for approximately 35% of the costs associated with the well.

11

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 3 — OIL AND GAS PROPERTIES AND EQUIPMENT (continued).

On May 7, 2012, per Memorandum of Understanding on the Robert Simmons lease, dated December 16, 2011, the Company opted into the participation right to drill Simmons Well TNKY#0012 for 23.775% working interest at the cost of approximately $12,000 and is responsible for approximately 30% of the costs associated with the well.

On May 8, 2012 per a Memorandum of Understanding the Company permitted 25% working interests in the Billy Duvall Well #2 at the cost of $16,500 and is responsible for 30% of the all costs associated with the well.

On May 25, 2012, per Memorandum of Understanding on the Robert Simmons lease, dated December 16, 2011; the Company opted into the participation right to drill Simmons Well TNKY#0013 for 23.775% working interest at the cost of approximately $12,000 and is responsible for approximately 30% of the costs associated with the well.

On July 10, 2012, per Memorandum of Understanding on the Blaydes lease, dated December 16, 2011, the Company opted into the participation right to drill Blaydes #Coomer1 for 12.38% working interest at the cost of approximately $6,000 and is responsible for approximately 15% of the costs associated with the well.

On July 10, 2012, per Memorandum of Understanding on the JR Clark lease, dated December 16, 2011, the Company opted into the participation right to drill JR Clark #W-1 for 12.38% working interest at the cost of approximately $6,000 and is responsible for approximately 15% of the costs associated with the well.

On July 10, 2012, per Memorandum of Understanding on the Pansy Clark lease, dated December 16, 2011, the Company opted into the participation right to drill Pansy Clark #W-1 for 12.38% working interest at the cost of approximately $6,000 and is responsible for approximately 15% of the costs associated with the well.

On July 10, 2012, per Memorandum of Understanding on the Pansy Clark lease, dated December 16, 2011, the Company opted into the participation right to drill Pansy Clark #W-2 for 12.38% working interest at the cost of approximately $6,000 and is responsible for approximately 15% of the costs associated with the well.

On July 27, 2012, per a Memorandum of Understanding the Company participated and permitted 25% working interests as the operator in the Teddy Hicks Well #1 at the cost of $17,000 and is responsible for 32% of the all costs associated with the well.

On July 27, 2012, , the Company entered into a 85% interest in a 100% working interest lease named the Jimmie and Linda Irby Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 31.24 acres, located in Clinton County, Kentucky.

On August 21, 2012, per Memorandum of Understanding on the Chambers lease, dated December 16, 2011, the Company opted into the participation right to drill Chambers #27 for 30% working interest at the cost of approximately $6,000 and is responsible for approximately 30% of the costs associated with the well.

On August 22, 2012, per Memorandum of Understanding on the Robert Simmons lease, dated December 16, 2011; the Company opted into the participation right to drill Simmons Well W-1 for 15% working interest at the cost of approximately $12,000 and is responsible for approximately 15% of the costs associated with the well.

On August 27, 2012, per Memorandum of Understanding on the Bayer lease, dated January 31, 2012, the Company opted into the participation right to drill Bayer #10 for 30% working interest at the cost of approximately $9,500 and is responsible for approximately 30% of the costs associated with the well.

On September 15, 2012, per Memorandum of Understanding on the Charles and Linda Anderson lease, dated December 6, 2011, the Company opted into the participation right to drill Anderson #14 for 12.5% working interest at the cost of approximately $4,000 and is responsible for approximately 12.5% of the costs associated with the well.

On September 15, 2012, per Memorandum of Understanding on the Charles and Linda Anderson lease, dated December 6, 2011, the Company opted into the participation right to drill Anderson #15 for 30% working interest at the cost of approximately $4,000 and is responsible for approximately 30% of the costs associated with the well.

12

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 3 — OIL AND GAS PROPERTIES AND EQUIPMENT (continued).

On September 24, 2012, the Company entered into an agreement for an 87.5% working interest in approximately 325 acres in Clinton County, Kentucky pursuant to the terms an Oil and Gas Lease dated September 24, 2012, by and between the Company and Millard Willis for an initial cost to the Company of $20,000. In accordance with the agreement, the Company is responsible for 100% of the costs on the Willis Lease.

On October 1, 2012, the Company entered into a 50% interest in a 87.5% working interest lease named the Gerald Norrad Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 300 acres, located in Overton County, Tennessee.

On October 1, 2012, the Company entered into a 37.5% interest in a 75% working interest lease named the John Lee Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 113 acres, located in Pickett County, Tennessee.

On October 1, 2012, the Company entered into a 25% interest in a 87.5% working interest lease named the Barclay Kirkland Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 68 acres, located in Cumberland County, Kentucky.

On October 4, 2012, per a Memorandum of Understanding the Company participated and permitted 25% working interests as the operator in the Barclay Kirkland Well #1 in Cumberland County, Kentucky at the cost of approximately $15,500 and is responsible for 32% of the all costs associated with the well, pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated October 1, 2012 by and between the Company and Mr. Daniel (Allen) Page a related party for an initial cost to the Company of $10. The Company is responsible for 32% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 68% of such costs.

On October 12, 2012, per a Memorandum of Understanding the Company participated and permitted 27.5% working interests as the operator in the William Bradley Well #3 at the cost of $18,500 and is responsible for 32% of the all costs associated with the well.

On October 15, 2012, per Memorandum of Understanding on the Chambers lease, dated December 16, 2011, the Company opted into the participation right to drill Chambers #W-1 for 15% working interest at the cost of approximately $6,000 and is responsible for approximately 15% of the costs associated with the well.

On October 23, 2012, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Gerald Norrad Well #1 at the cost of approximately $12,000 and is responsible for 50% of the all costs associated with the well.

On October 23, 2012, the Company entered into a 15% interest in an 75% working interest in John Lee Well #1 in Pickett County, Tennessee pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated October 1, 2012 by and between the Company and Mr. Daniel (Allen) Page a related party for an initial cost to the Company of $10. The Company is responsible for 25% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 75% of such costs.

On January 23, 2013, per a Memorandum of Understanding the Company participated and permitted 25% working interests as the operator in the Betty McCoomas Well #7 at the cost of $18,500 and is responsible for 32% of the all costs associated with the well.

Impairment of Oil Properties

We use the successful efforts-cost accounting method, which requires recognition of an impairment of oil and gas properties when the total capitalized costs (net of related deferred income taxes) exceed a “ceiling” as described in Note 3.

Amortization Rate

Amortization of oil property is calculated quarterly based on the quarter’s production in barrels of oil equivalent (“BOE”) times an amortization rate. The amortization rate is an amortization base divided by the BOE sum of proved reserves at the end of the quarter and production during the quarter. The amortization base consists of (i) the capitalized evaluated oil costs at the end of the quarter before recording any impairment at quarter’s end, plus (ii) estimated future development costs for the proved reserves, less (iii) accumulated amortization at the beginning of the quarter.

13

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

The following table shows by type of asset the Depreciation, Depletion and Amortization (“DD&A”) expense for three months ended March 31, 2013 and 2012:

2013

2012

Amortization of costs for evaluated oil properties

$

54,524

$

75,335

Depreciation of office equipment, furniture and software

5,618

8,930

Total DD&A expense

$

60,142

$

84,265

The resulting depletion and depreciation costs of $60,142 and $84,265 for the three months ended March 31, 2013 and 2012, respectively, have been recorded under the caption heading “oil lease operating expense” on our Statement of Operations.

In April 2007 we executed an agreement with Mr. Daniel (Allen) Page whereby we received $250,000 in funds to be advanced through a line of credit which was evidenced by a convertible promissory note. The note bears interest at a rate of 7.5% per annum and had an original maturity date of April 23, 2008. The initial $250,000 advanced under the credit line is convertible at any time into shares of our common stock at a price per share equal to $0.35. We pay interest only payments until the maturity date of the convertible note, unless it is converted or prepaid. Upon maturity or the conversion of the initial $250,000 principal amount and interest due under the note, we also agreed to issue to Mr. Page a four year warrant to purchase shares of common stock with an exercise price of $0.35 per share in an amount equal to 20% of the total shares issued upon conversion of the note. On September 27, 2007, Mr. Page amended the note to provide an additional $100,000 of working capital to us. Under the terms of the amendment, the additional $100,000 is convertible into shares of our common stock at a price per share equal to $0.18. As consideration for this increase of availability under the credit line, at such time as the note matures or he converts the additional $100,000 into common stock, we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total shares to be issued upon the conversion of that portion of the note with an exercise price of $0.18 per share. On May 1, 2009 we entered into a second amendment of the note to provide for an additional $50,000 of working capital to us, bringing the total amount available under the credit line to $400,000. Under the terms of the amendment, the additional $50,000 is convertible into shares of our common stock at a price per share equal to $0.12. As consideration for this extension, upon maturity of the note or at such time as he converts the note we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total share amount issued upon conversion of the note, with an exercise price of $0.12 per share, solely as it relates to this additional $50,000.

On December 8, 2009 Mr. Page extended the due date of the note to June 30, 2010. The warrants we will issue Mr. Page will expire four years from the date of issuance, which shall be deemed to be on the earlier of (i) the maturity date of the note; (ii) the date on which the funds are advanced in full and owing by us; or (iii) the date on which we elect to pay off the note in full during the term. We agreed to register for resale the shares underlying the convertible note and warrants, but we have not filed the required registration statement. On June 29, 2010, Mr. Page extended the due date of the note to December 31, 2010. Effective December 13, 2010, the Company entered into a Fifth Amendment to the Convertible Line of Credit Note with Mr. Daniel (Allen) Page pursuant to which he extended the due date of all amounts due under the Convertible Line of Credit from December 31, 2011. The Convertible Line of Credit is now due on demand. In April 2012, the Company entered into a Security Agreement with Mr. Page pursuant to which it granted him a security interest in all of the Company’s assets as collateral for the amounts due under the Convertible Line of Credit.

At March 31, 2013 and December 31, 2012, we owed Mr. Daniel (Allen) Page $180,000 and $180,000, respectively of principal and approximately $3,784 and $455, respectively of accrued but unpaid interest under this credit line. Mr. Daniel (Allen) Page, a principal shareholder of our Company, is the father of Mr. Ken Page, currently our sole officer and a member of our Board of Directors. We have also entered into a number of joint ventures with Mr. Daniel (Allen) Page. See Note 6- Related Party Transactions.

Convertible notes payable and loans payable are summarized as follows:

March 31,

2013

December 31,

2012

Convertible line of credit note payable to a related party with an interest rate of 7.5% per annum, due December 31, 2012

180,000

180,000

$

180,000

$

180,000

14

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 5 — STOCKHOLDERS’ DEFICIT.

Common Stock

On January 19, 2012, Robert H. Woods, Jr. converted his original note dated October 28, 2005 issued in the principal amount of $50,000 and had an outstanding balance of approximately $21,800 in accrued interest. The conversion price of $0.25 issued 287,146 shares of common stock.

During 2012, Mr. Ken Page forgave accrued salary due in the amount of $85,076, which had been accrued pursuant to the terms of his employment agreement. Such monies have been recorded as a contribution to capital.

Stock Options

On March 22, 2004 our Board of Directors adopted, subject to stockholder approval, the 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan was approved by our stockholder in May 2004. No award could be granted under the 2004 Plan subsequent to the 10th anniversary of the date on which the plan was approved by our stockholders. The number of shares of our common stock available for issuance under the 2004 Plan was 3,500,000.

On September 29, 2009 our Board of Directors adopted our 2009 Equity Compensation Plan (the “2009 Plan”). The plan authorizes the grant of (i) options which qualify as incentive stock options under Section 422(b) of the Internal Revenue Code of 1986, as amended, (ii) non-qualified options which do not qualify as incentive stock options, (iii) awards of our common stock (iv) and rights to make direct purchases of our common stock which may be subject to certain restrictions. We have reserved 4,800,000 shares of our common stock for issuance upon grants made under the plan.

On December 14, 2010 our Board of Directors granted Mr. Page five year non-qualified options under to purchase 1,500,000 shares of our common stock at an exercise price of $0.30 per share. The Options were valued using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, annual volatility of 234%, risk free interest rate of 0%, and expected life of 4.5 years.

Compensation based stock option and warrant activity for warrants and qualified and unqualified stock options are summarized as follows:

Shares

Weighted Average

Exercise Price

Outstanding at December 31, 2010

4,557,644

$

0.31

Granted

-

.00

Exercised

-

.00

Expired or cancelled

-

.00

Outstanding at December 31, 2012

4,557,644

$

.31

Granted

-

-

Exercised

-

-

Expired or cancelled

-

-

Outstanding at March 31, 2013

4,557,644

$

.31

NOTE 6 –RELATED PARTY TRANSACTIONS.

The Company has entered into a one year employment arrangement with its CEO, in September 2007, with automatic annual renewals. The employment arrangement required an annual salary of $40,000 and a monthly expense allowance of $1,000, with 3,000,000 stock options issued. These stock options vest from March 2008 to September 2008 and have a $0.20 exercise price for three years. In September 2009, this employment agreement was amended to reduce the monthly salary to be $4,167.67 a month and an additional 120,000 options were issued with an exercise price of $0.25, vesting 10,000 options monthly commencing in September 2009. On December 14, 2010, our Board of Directors granted Mr. Ken Page five year non-qualified options under to purchase 1,500,000 shares of our common stock at an exercise price of $0.30 per share. The options were valued using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, annual volatility of 407%, risk free interest rate of 0%, and expected life of 4.5 years.

15

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 6 –RELATED PARTY TRANSACTIONS. (continued).

During 2012, Mr. Ken Page forgave accrued salary due in the amount of $85,076, which had been accrued pursuant to the terms of his employment agreement. Such monies have been recorded as a contribution to capital.

On October 15, 2010, the Company entered into a 50% interest in an 87.5% working interest in Robbins Well #2 in Overton County, Tennessee pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated October 15, 2010 by and between the Company and Mr. Daniel (Allen) Page for an initial cost to the Company of $0. The Company is responsible for 50% of the costs on this well and Mr. Page is responsible for the remaining 50% of such costs.

On August 31, 2011, the Company entered into a 15% interest in an 75% working interest in De Loy Brow #10 in Clinton County, Kentucky pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated August 31, 2011 by and between the Company and Mr. Daniel (Allen) Page a related party for an initial cost to the Company of $10. The Company is responsible for 25% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 75% of such costs.

On April 12, 2012, the Company entered into a 35% interest in a 100% working interest lease named the Teddy Hicks Leasebetween the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 70 acres, located in Clinton County, Kentucky. The Company is responsible for 42% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 58% of such costs.

On July 27, 2012, the Company entered into a 85% interest in a 100% working interest lease named the Jimmie and Linda Irby Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 31.24 acres, located in Clinton County, Kentucky.

On December 09, 2011, the Company made payments of approximately $300,000 towards accrued interest and principal reduction of the outstanding notes payable due to Mr. Daniel (Allen) Page and accrued consulting expenses. At December 31, 2012 and 2011, we owed Mr. Daniel (Allen) Page $180,000 and $180,000, respectively of principal and approximately $455 and $0, respectively of accrued but unpaid interest under this credit line.

In July 2012, the Company has entered into a one year consulting arrangement for services to be rendered from time to time by Mr. Daniel (Allen) Page who is also a principal stockholder of the Company and the father of the Company’s CEO for an annual fee of $40,000, which has since been extended annually. At December 31, 2012 and 2011 we owed Mr. Daniel (Allen) Page $31,149 and $0, respectively of accrued consulting expenses.

On October 1, 2012, the Company entered into a 50% interest in a 87.5% working interest lease named the Gerald Norrad Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 300 acres, located in Overton County, Tennessee.

On October 1, 2012, the Company entered into a 37.5% interest in a 75% working interest lease named the John Lee Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 113 acres, located in Pickett County, Tennessee.

On October 1, 2012, the Company entered into a 25% interest in a 87.5% working interest lease named the Barclay Kirkland Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $10. The lease is of approximately 68 acres, located in Cumberland County, Kentucky.

On October 4, 2012, per a Memorandum of Understanding the Company participated and permitted 25% working interests as the operator in the Barclay Kirkland Well #1 in Cumberland County, Kentucky at the cost of approximately $15,500 and is responsible for 32% of the all costs associated with the well, pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated October 1, 2012 by and between the Company and Mr. Daniel (Allen) Page a related party for an initial cost to the Company of $10. The Company is responsible for 32% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 68% of such costs.

On October 23, 2012, the Company entered into a 15% interest in an 75% working interest in John Lee Well #1 in Pickett County, Tennessee pursuant to the terms of that certain Assignment of Interest in Oil and Gas Lease dated October 1, 2012 by and between the Company and Mr. Daniel (Allen) Page a related party for an initial cost to the Company of $10. The Company is responsible for 25% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 75% of such costs.

16

TN-K ENERGY GROUP INC.

NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS

as of March 31, 2013 and December 31, 2012 and three months ended March 31, 2013 and 2012

NOTE 6 — RELATED PARTY TRANSACTIONS (continued).

On December 09, 2011, the Company made payments of approximately $300,000 towards accrued interest and principle reduction of the outstanding notes payable due to Mr. Allen (Dan) Page and accrued consulting expenses. At March 31, 2013 and December 31, 2012 we owed Mr. Page $180,000 and $180,000, respectively of principal and approximately $3,729 and $0, respectively of accrued but unpaid interest under this credit line. At March 31, 2013 and December 31, 2012 we owed Mr. Page $8,000 and $0, respectively of accrued consulting expenses.

NOTE 7 — COMMITMENTS AND CONTINGENCIES.

The Company may be subject to various possible contingencies, which are derived primarily from interpretations of federal and state laws and regulations affecting the oil and gas industry. Although management believes it has complied with the various laws and regulations, new rulings and interpretations may require the Company to make future adjustments.

The Company continually evaluates its leasehold interests, therefore certain leases may be abandoned by the Company in the normal course of business.

The Company has been involved in litigation from time to time as a result of the failure to make payments on certain of its past due debts. Overall management believes the net recorded value of its past due payables adequately cover the total financial exposure of the past due payables.

NOTE 8 ─ SUBSEQUENT EVENTS.

On April 17, 2013 per Memorandum of Understanding the Company sold 27.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #1 for $22,000 and is responsible for 35% of all the costs associated with the well.

On April 23, 2013, per a Memorandum of Understanding the Company participated and permitted 60% working interests as the operator in the Millard Willis Well #1 at the cost of $18,500 and is responsible for 65% of the all costs associated with the well.

17

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operation for the First Quarter 2013 and the First Quarter 2012 should be read in conjunction with the unaudited financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2012 as previously filed with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

Overview

We are an independent oil exploration and production company, engaged in acquiring oil leases and exploring and developing crude oil reserves and production in the Appalachian basin. We concentrate our operations in Kentucky and Tennessee primarily in the Murfreesboro, Knox and Wells Creek formations, although we also have assets located in the Granville, Stones River and Sunnybrook formations. All of these formations are primary known producing formations. Our growth strategy is to focus on our operational growth in our core area, to convert our unproved reserves to prove reserves and to continue our acreage acquisitions while maintaining balanced, prudent financial management. In the past three recent years, we have realized substantial benefits from the sale of concentrations of our reserves, although this is not a focus, we do evaluate from time to time potential sales of our reserves for strategic and capital reasons.

Our Operations

Our operations are divided between leases in which we have a participation interest/overriding royalty interest and leases in which we are the operator. Interests owned by participation leases means we have a working or royalty interest in a property that is operated or maintained by another interest owner under an agreement. Overriding royalty interest means we assisted in the negotiations between the buyers and sellers of lease sales which we retained a royalty interest, and are provided options for additional participation of future wells. For participation leases, we receive payments for our oil sales from the operator and we are billed by the operator for a percentage of joint expenses relative to the costs of drilling and transporting the oil from the wells to the sales point. Since 2010, we have entered into a number of participation leases and working interest leases with third parties in which Mr. Daniel (Allen) Page, a related party, is also a party.

For drilling operations on leases in which we are the operator, we hire third parties to provide contract drilling services to us on an as needed basis. We have been able to reduce or eliminate our financial exposure in the initial drilling in our projects by creating joint venture arrangements that provide for others to pay for all or a disproportionate share of the initial drilling costs in exchange for a working or royalty interest in the well. In April 2013, we sold 27.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #1 for $22,000 which those parties are responsible for 35% of all the costs associated with the well. We expect to continue to use these types of relationships to partially or completely fund initial drilling of future wells.

During 2013, we plan to continue to expand our acreage position in our core area, focusing on acreage we will operate. In addition to the challenges faced by small independent oil and gas companies, we continue to face a number of challenges in executing our business model which are particular to our company. Our revenues decreased 66% for the First Quarter 2013 from the First Quarter 2012, and our income from operations increased 55% from period to period. These decreases are attributed to both the lack of a revenue from finder’s fees in 2013 period and the natural depletion of wells and downtime. During 2012, we began focusing on modifying our business plan to reduce drilling and completion cost through negotiated sales and acquiring overriding royalty interest within previously operated leases and new leaseholds.

During the balance of 2013, we plan to continue to expand our acreage position in our core area, focusing on acreage we will operate as well as overriding royalty interest in new acres and participation in applicable drilling rights. At March 31, 2013 and December 31, 2012, our balance sheet includes approximately $3.45 million and $3.46 million of obligations, a substantial portion of which relates to the prior business of our company before those operations were discontinued in 2005. Other than the secured credit line due a related party, none of the remaining obligations represent secured debt, although a number of the creditors have obtained judgments against our company. We do not have the resources to satisfy these obligations. If one or more of these judgment creditors should seek to enforce the judgment, our ability to continue our operations as they are presently conducted is in jeopardy.

We also face the challenge of limited personnel and diversion of our management’s time and attention. In 2011 we hired a part-time accountant and in 2012 we hired a part-time office assistant, but as our company continues to grow, we need hire additional staff to handle the increasing needs of our company, including from an administrative standpoint, and we need to invest in internal systems to ensure that our financial statements are properly prepared. Lastly, we need to raise additional capital to fund these necessary infrastructure increases and our continued expansion, as well as to provide adequate funds to satisfy our obligations. We have been relying on funding available to us under a secured line of credit extended by Mr. Daniel (Allen ) Page, a related party, which matured in December 2011 and is due on demand. As described elsewhere herein, in April 2012 we granted Mr. Daniel (Allen ) Page a security interest in all of our assets as collateral for this obligation. At March 31, 2013, $180,000 is outstanding under this facility which is the maximum amount available as the credit line matured in December 2011. The amount is convertible into shares of our common stock at various prices, but there are no assurances the holder will convert the obligation.

18

We do not have any external sources of liquidity. Our working capital is not sufficient to fund our operations and pay our obligations, many of which are past due, and may impede our ability to further grow our company. Although we need to raise additional working capital, we do not have any commitments for capital from third parties. Given the small size of our company, the quotation of our stock in the over-the-counter market and the significant liabilities on our balance sheet, we expect to encounter significant obstacles in raising equity or debit capital. If we are unable to access capital as needed, our ability to grow our company is in jeopardy and absent a significant increase in our revenues we may be unable to continue as a going concern.

Going Concern

For the First Quarter of 2013, we reported a net loss of $83,935 and at March 31, 2013 we have an accumulated deficit of $16.0 million. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2012 contains an explanatory paragraph regarding our ability to continue as a going concern based upon our operating losses and need to raise additional capital. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to increase our revenues and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.

Results of Operations

Our revenues can include revenues from oil sales generated both from wells in which we are the operator as well as those in which we have a working interest, as well as from non-recurring well services and sales of interest in oil and gas leases to third parties and finder’s fees for the culmination of the sale of oil well interests between third parties. While oil sales revenues are constant from period to period, revenues from sales of oil and gas leases and finder’s fees are transaction based on one-time for the particular transaction. As such, we may not report revenues from those sources in all periods. Oil sales revenues decreased 29% in the First Quarter 2013 compared to the First Quarter 2012 due to low production income as the weather conditions were unfavorable for pumping during the period, as well as a decline in the average sales price of oil. During the First Quarter 2013, the average sales price (including transfers) per unit of oil extracted from wells drilled by us was approximately $91 as compared to approximately $99 for the First Quarter 2012.

Our total operating expenses in First Quarter 2013 decreased approximately 56% from the First Quarter 2012 which is directly related to the new business plan to reduce drilling and completion cost through negotiated sales and acquiring overriding royalty interest within previously operated leases. Oil lease operating expenses, which includes, our portion of the cost of contract drillers, other expenses associated with the drilling operations and depletion expense, were 115% of revenues in First Quarter 2013 as compared to 126% in First Quarter 2012 which is attributable to our lower than usual amount of production and increased participation in drilling activities.

No oil and gas leases were sold in First Quarter 2013.

During First Quarter 2013, our sales, general and administrative expenses decreased approximately 18% from the comparable period in 2012. This decrease is primarily attributable to Mr. Ken Page’s forgiveness of accrued salary that is no longer accruing as of December 31, 2012. We anticipate our operating expenses will increase during the balance of 2013 which will be reflective of our increased operations. We are not able at this time, however, to quantify the amount of the expected increase.

During First Quarter 2013 and 2012, we recognized an impairment expense of $75 and $120,192; respectively, which is related to impairment of developed properties. However, given the nature of our operations it is likely we will recognize comparable expenses in future periods.

Our interest expense during First Quarter 2013 and 2012 was $3,729 and $5,346; respectively. The decreased is the result of the decreased amounts outstanding principal under the line of credit provided by a related party which provides funding for our operations.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. At March 31, 2013, we had a working capital deficit of $3,170,329 as compared to a working capital deficit of $3,142,186 at December 31, 2012. Our current assets at March 31, 2013 include accounts receivable and receivables from the sale of a partial interest in oil wells of $22,513 compared to $24,895; respectively, which are due 30 days from invoicing. Our current liabilities includes approximately $3.46 million of accounts payable and accrued expenses, as of March 31, 2013, compared to $3.47 million of accounts payable and accrued expenses. Included in our accrued expenses, as of March 31, 2012 is approximately $41,000 of consulting expenses due a related party, and approximately $154,000 of accrued taxes. In addition, at March 31, 2013 we owe a related party $180,000 of principal and $3,729 of accrued interest under a secured line of credit described below.

19

Net cash used by operating activities for the First Quarter 2013 was ($37,726) as compared to the net cash provided in the First Quarter of 2012 was $57,068. During the First Quarter 2012, cash was provided by our net income and increases in our accounts payable offset by increased in accounts receivable. Net cash used in investing activities in the First Quarter 2013 reflects the purchase of oil and gas leases and fixed assets, as compared to net cash used in investment activities in First Quarter 2012 reflects the purchase of oil and gas leases and fixed assets. There were no net cash used in financing activities in the First Quarter 2013 or the First Quarter of 2012.

Secured line of credit with Mr. Daniel (Allen) Page.

In April 2007, we executed an agreement with Mr. Daniel (Allen) Page whereby we received $250,000 in funds to be advanced through a line of credit which was evidenced by a convertible promissory note. The note bears interest at a rate of 7.5% per annum and had an original maturity date of April 23, 2008. The initial $250,000 advanced under the credit line is convertible at any time into shares of our common stock at a price per share equal to $0.35. We pay interest only payments until the maturity date of the convertible note, unless it is converted or prepaid. Upon maturity or the conversion of the initial $250,000 principal amount and interest due under the note, we also agreed to issue to Mr. Daniel (Allen) Page a four year warrant to purchase shares of common stock with an exercise price of $0.35 per share in an amount equal to 20% of the total shares issued upon conversion of the note.

On September 27, 2007, Mr. Daniel (Allen) Page amended the note to provide an additional $100,000 of working capital to us. Under the terms of the amendment, the additional $100,000 is convertible into shares of our common stock at a price per share equal to $0.18. As consideration for this increase of availability under the credit line, at such time as the note matures or he converts the additional $100,000 into common stock, we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total shares to be issued upon the conversion of that portion of the note with an exercise price of $0.18 per share.

On May 1, 2009, we entered into a second amendment of the note to provide for an additional $50,000 of working capital to us, bringing the total amount available under the credit line to $400,000, and to extend the maturity date of the note to December 31, 2009. Under the terms of the amendment, the additional $50,000 is convertible into shares of our common stock at a price per share equal to $0.12. As consideration for this extension, upon maturity of the note or at such time as he converts the note we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total share amount issued upon conversion of the note, with an exercise price of $0.12 per share, solely as it relates to this additional $50,000.

On December 8, 2009, Mr. Daniel (Allen) Page extended the due date of the note to June 30, 2010. The warrants we will issue Mr. Page will expire four years from the date of issuance, which shall be deemed to be on the earlier of (i) the maturity date of the note; (ii) the date on which the funds are advanced in full and owing by us; or (iii) the date on which we elect to pay off the note in full during the term. We agreed to register for resale the shares underlying the convertible note and warrants, but we have not filed the required registration statement. On June 29, 2010, Mr. Daniel (Allen) Page extended the due date of the note to December 31, 2010.

Effective December 13, 2010, we entered into a Fifth Amendment to the Convertible Line of Credit Note with Mr. Daniel (Allen) Page pursuant to which he extended the due date of all amounts due under the Convertible Line of Credit to December 31, 2011. The Convertible Line of Credit is now due on demand. In April 2012 we entered into a Security Agreement with Mr. Daniel (Allen) Page to provide collateral for the repayment of this obligation. The Security Agreement provides that if there is an “event of default” under the agreement, the lender is entitled to take possession of our assets. Events of default include, among other items, (i) a failure to pay the obligations when due, (ii) a judgment in excess of $10,000, (iii) appointment of a receiver or an event of bankruptcy, or (iii) a breach by us of any covenant of the Security Agreement. Under the terms of the Security Agreement, we also agreed not to take certain actions, including:

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not incur additional indebtedness, other than trade payables and certain permitted liens,

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declare or pay any dividends on our securities,

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prepay any indebtedness,

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make any advances or loans to any person,

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assume, guaranty or otherwise become liable for the debt of any other person,

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enter into any merger, consolidation or other reorganization or acquire all or any assets of another business,

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form a subsidiary or enter into any partnership or joint venture,

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materially change the nature of our business,

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enter into any transaction with an affiliate except in the ordinary course on arms-length terms or

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bill any receivable under any other name than our corporate name.

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We have entered into a number of extension agreements with Mr. Page and the line of credit is presently due on December 31, 2013. The warrants we will issue Mr. Page will expire four years from the date of issuance, which shall be deemed to be on the earlier of (i) the maturity date of the note; (ii) the date on which the funds are advanced in full and owing by us; or (iii) the date on which we elect to pay off the note in full during the term. We agreed to register for resale the shares underlying the convertible note and warrants for resale, but we have not filed the required registration statement. At March 31, 2013 and December 31, 2012, we owed Mr. Page $180,000 and $180,000; respectively, of principal and approximately $3,729 and $0, respectively of accrued but unpaid interest under this credit line, net of repayments.

Recent Accounting Pronouncements

All new accounting pronouncements issued but not yet effective have been evaluated and determined to be not applicable or immaterial to the financial statement of the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this report, our Chief Executive Officer who also serves as our principal financial and accounting officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses.

The material weakness identified for the period ended December 31, 2012 were related to insufficient personnel and accounting resources are were adequate to allow sufficient time to (i) perform a review of the consolidation and supporting financial statement disclosure schedules independent of the preparer (ii) adequately prepare for our quarterly reviews and annual audit and (iii) research all applicable accounting pronouncements as they relate to our financial statements and underlying disclosures. These material weaknesses have not been remediated and continued through the end of the First Quarter 2013. Due to these material weaknesses, in preparing our financial statements for the period ended March 31, 2013 we performed additional analysis and other post close procedures to ensure that such financial statements were stated fairly in all material respects in accordance with U.S. generally accepted accounting principles. Until such time as we remediate these material weaknesses, we expect that the material weaknesses in our disclosure controls and procedures will continue.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.